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Two Companies Going Downhill

Posted on Friday, Oct 8th 2010

Early in the year, we saw that Garmin (NASDAQ:GRMN), which is known for its personal navigation devices (PND), was looking to launch more smartphones even after disappointing sales of its nüvifone. Now it is finally correcting its flawed strategy and looking to exit its smartphone business. Let’s take a closer look.
Garmin Refocusing on PND Market
Ed Hansberry of Information Week reports that Garmin has sold only $27 million worth of smartphones in the recent second quarter and is prepared to exit the smartphone business in the next two quarters if there is no change. He adds

“Garmin has really taken their GPS strengths and wrapped a phone around it. A few years ago that may have been acceptable, but today, almost all smartphones have a GPS radio and access to mapping and location software that is good enough to get you where you need to go.”

I agree. The smartphone market is extremely crowded and competitive. Even heavyweights like RIM and Nokia are finding it hard to fight competition from iPhone and Android devices. There are a lot of factors at play here: the operating system, applications, and the ability to innovate constantly. Garmin has only its GPS strength and cannot compete on any of the factors that matter. It would be most prudent for the company to invest its money elsewhere, such as in its recent acquisition of MetriGear, the creator of an innovative pedal-based power solution for cycling, to increase its cycling market position.

Garmin’s Financials
Garmin in its second quarter reported total revenue of $729 million, up 9% y-o-y on 8% growth in unit ships. Diluted EPS was $0.67, down 17% y-o-y from $0.81 last year. Gross margin was stable at 54% versus 53% last year and 54% last quarter. Its cash and marketable securities balance is over $1.8 billion. During the quarter, Garmin paid dividends worth $299 million and repurchased 1.6 million shares.

By segment, Automotive/Mobile revenue increased 2% to $447 million, Outdoor/Fitness revenue increased 32% to $143 million, Aviation revenue increased 1% to $65 million, and Marine revenue increased 23% to $74 million. By region, North America revenue was up 4% to $455 million, Europe revenue was up 14% to $226 million, and Asia revenue was up 37% to $48 million.

In an interview with Reuters, CFO Kevin Rauckman said that PND market sales volumes will decline 5% a year over the next couple of years. Unit growth in the North American and European markets will be “very difficult” over the next couple of years while some growth is expected to come from the smaller markets of Latin America and Asia-Pacific. Garmin’s PND business is not where it used to be: After hitting a peak in 2008, global PND shipments declined in 2009 and are expected to continue on a downward spiral. The company has come under pressure as Google and Nokia in late 2009 started offering navigation features free. For 2010, Garmin expects revenue of $2.8 to $3 billion and EPS of $2.75 to $3.15. In 2009, revenue was $2.95 billion. The stock is currently trading around $30 with market cap of about $6 billion. It hit a 52-week high of $40.47 on March 25. The path forward looks precarious.

Chart forGarmin Ltd. (GRMN)

TiVo Can Learn From Apple iTV

TiVo (NASDAQ:TIVO), the pioneer of digital video recording (DVR), is also becoming obsolete with the advent of services like Hulu, Netflix, and iTunes. Paul Miller of Engadget reports that Steve Jobs recently introduced a $99 Apple iTV that would rely on the cloud for content and provide access to Netflix, YouTube, and HD TV rentals. Viewers can also stream from your computer or iPad. That is the kind of reinvention that terrifies TiVo.

TiVo Turns to Licensing
TiVo instead is looking more like a licensing company. It is embroiled in lawsuits against EchoStar and Dish as well as AT&T and Verizon. The U.S. Patent and Trademark Office has reaffirmed the validity of all its patent claims for its “time-warp” digital video recorder technology in the second re-examination. In June, the patent office ruled that TiVo’s patent claims were invalid. In March, a federal appeals court ruled that EchoStar and Dish infringed on TiVo’s patent and asked them to pay $300 million in damages. The latest ruling is final, and TiVo will finally get to see the money. It will also improve its negotiating position in its lawsuits with AT&T and Verizon. The DVR patent was registered in 1998 and expires in 2018.

TiVo’s FinancialsTiVo recently reported a second-quarter loss of $15.3 million or $0.13 per share versus loss of $2.7 million last year. Revenue was up $51.5 million, down 10.6% with service and technology revenue at $42.1 million, which was down 13.7%. TiVo ended the quarter with $240 million in cash and short-term investments and no debt.

TiVo recently announced an important deal with Cox Communications, the third-largest U.S. cable television operator, to promote TiVo Premiere to its customers and integrate access to Cox OnDEMAND service into TiVo Premiere.  TiVo has licensing deals with Comcast, Cox, and DirecTV and has entered into partnerships with Blockbuster, Netflix, Amazon.com, Best Buy, Virgin Media, RCN, and Walt Disney.

For the third quarter of fiscal 2011, TiVo anticipates service and technology revenues in the range of $40 million to $42 million, a net loss in the range of $19 million to $21 million. The stock is trading around $10 with market cap of about $1 billion. It hit a 52-week high of $18.93 on April 26 and a 52-week low of $7.05 on June 29. Also a precarious path forward!

Chart forTiVo Inc. (TIVO)

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<In March, a federal appeals court ruled that EchoStar and Dish infringed on TiVo’s patent and asked them to pay $300 million in damages. The latest ruling is final, and TiVo will finally get to see the money.>

This isn't true. The Appeals Court granted Echostar/Dish an en banc hearing and oral arguments are November 9th. If Tivo loses that, they will most likely have to have a jury trial on Dish's workaround attempt and the court case will last another 2 years.

Nomo Monday, October 11, 2010 at 3:02 PM PT